A toy koala hangs over the officers' bar on the Spanish naval supply ship, Cantabria. A large red kangaroo is affixed to one of the inner-deck walls. Both are mementos from the 10 months the Spanish ship spent working with the Royal Australian Navy in 2013.

They also symbolise the close ties between Spain's government-owned ship builder, Navantia, and the RAN – and the potential for more.

Despite its relatively modest size, the naval ship building industry in Australia still has huge political and financial significance. That extends well beyond brawling over the massive – and massively expensive – Australian submarine project. The arguments range over trade-offs between keeping Australian skilled jobs to balancing international and security considerations to accepting higher up-front costs for the lure of broader national economic benefits.  

Navantia's Cantabria, for example, is the model the Spanish hope will win the tender for the Australian navy's two new supply and refuelling ships. The only other contender is South Korea's Daewoo company, following the government's decision Australian ship yards were out of the running because of costs blow-outs and delays on other projects.

Navantia also designed and built the hulls of the largest warships in the Australian navy, the 27,000-tonne amphibious assault ships HMAS Canberra and HMAS Adelaide, before the ships came to Australia for final build, fit-out and installation of electronic systems. The Spanish have been called in now to help fix the $8.5 billion air warfare destroyer project, which is badly behind schedule and over budget. Although these were based on Navantia's design, the Spanish had been excluded from the construction consortium led by ASC in Adelaide, compounding difficulties in fixing flaws. This debacle was one reason behind the politically disastrous comment of former defence minister David Johnston he wouldn't trust ASC to build a canoe.

As for the future, Navantia is among those interested in Australia's new frigate project. Along with the contentious decision on the submarine build, the timing and Australian content involved in the frigates project will be crucial to industry hopes of avoiding what is known as the "valley of death". That means not having enough continuous work to sustain shipyards – an imminent prospect threatening the Williamstown dockyards in Melbourne.


Yet this is typical of the stop-start nature of Australian naval ship building, a history that makes it more expensive, as well as less efficient. That's why the Victorian and South Australian premiers focused on seemingly bland lines in the communique from the Council of Australian Governments meeting.

"COAG noted the contribution a continuous naval build strategy could make in strengthening Australia's industrial capability, employment, and specialist industry skills and workforce capability," the statement said. "The critical role of improvement in productivity was noted for a sustainable industry."

In political speak, this reflects the usual tussle between buying surface ships or submarines offshore more cheaply versus complications and costs but potential benefits of building locally. But those benefits are only real if sophisticated projects are completed efficiently. So far, that result is elusive, reflected in the latest government reports on the state of the industry.

This is a variation on Australia's finally resolved debate on continuing pouring in taxpayer dollars to protect an unviable car manufacturing industry. Unlike countries like Spain, Australia has as much prospect of building an export market out of naval ship building as it did from cars. Nor, realistically, will substantive design work come from Australia. It's more the degree of adaptation and how much local construction, content and skills are required.

But Australia's naval ship building industry argues a key difference comes from the need to protect national security and nurture highly specialised skills. It's why the demand for local "offsets" is typical of many countries' defence spending.  

Unfortunately the recent Rand Corporation report into ship building estimated the cost premium for building naval warships in Australia is about 30 to 40 per cent. It also described the economic benefits of a domestic shipbuilding industry as "unclear" despite potential long-term jobs.


It's not just Australian shipyards and 8000 current employees in building and repair keen to disagree with that assessment.

In Sydney's northern suburbs, for example, H. I. Fraser is a 60-year-old small manufacturing and engineering company. It specialises in supplying the Australian navy, as well as the oil and gas industry, with what general manager Chris Williams calls "the weird, niche and nasty". These are usually tiny runs of small and highly specialised kit from valves, fittings and mechanical components, able to be delivered quickly and efficiently, whether for maintenance or new construction.

The company employs 75 people in Perth and Sydney, mainly engineers and technicians, and Williams describes them as "passionate manufacturers".

He has already travelled to Japan and Germany to understand potential supply chain opportunities from those tendering for the new submarine build.
"To win work in Australia, you have to behave like an exporter, given there are no offsets or tariffs," Williams says.

He cites the company's high level of technical expertise because of early involvement in installation and commissioning, arguing this saves on costs for complex assets. Naturally, he's adamant it's vital to keep local engineering skills and jobs by maintaining a steady shipbuilding industry in Australia.

The Rand Corporation omitted any analysis of $50 billion worth of new submarines on the assumption the Abbott government – or at least the Prime Minister – was intent on them being designed and built in Japan.

Political outrage, especially from state Labor governments in South Australia and Victoria, has altered that since. But although the submarine tender process will be open to more countries now, it will still feature the same sort of arguments about the level of Australian involvement. Prepare for a lot more noise.

Author: Jennifer Hewitt                Source: AFR